Enterprise zone a boon to businesses

Kevin Guillen, Mercedez Ocampo, center, and Vicki Ruiz prepare artificial floral plant leaves before they are assembled and arranged into a centerpiece arrangement. Holiday Foliage, located in Otay Mesa, gets tax credits for some of its hiring.

Nelvin C. Cepeda

Kevin Guillen, Mercedez Ocampo, center, and Vicki Ruiz prepare artificial floral plant leaves before they are assembled and arranged into a centerpiece arrangement. Holiday Foliage, located in Otay Mesa, gets tax credits for some of its hiring.

Kevin Guillen, Mercedez Ocampo, center, and Vicki Ruiz prepare artificial floral plant leaves before they are assembled and arranged into a centerpiece arrangement. Holiday Foliage, located in Otay Mesa, gets tax credits for some of its hiring. (Nelvin C. Cepeda)

When Jason Kulpa, CEO of Underground Elephant, needed space for his Internet advertising firm, he was put off by the high cost of parking and rent downtown.

Then he heard about the state's enterprise zone program can mean as much as $37,500 per employee in tax credits, plus additional subsidies for equipment.

"We wouldn't be able to work downtown with it," said Kulpa, whose 55-employee company occupies the 13th floor of the office tower at 600 B St.

At the south end of the county, Kristine Vanzutphen, president of Holiday Foliage, knew about the zone benefits but her accountants knew little of the details.

Then she discovered that with a little paper work, she could qualify many of her 35 employees, who make artificial Christmas trees and other plant-like decorations out of plastic molded in her two Tijuana factories and shipped for Disney theme parks and stores and businesses all over the country. (Disneyland's towering Main Street holiday trees is one of her creations.) Her initial application netted her $160,000 that went to the bottom line.

"Though we had an increase in sales, we have to kind of be very economical in how we run our business," she said. "It gave me a little breathing room that I wasn't expecting."

The person who opened up the opportunities of enterprise zones was Brendan Foote, senior vice president at the Hughes Marino commercial brokerage overseeing the tax division.

"I've been doing this since 2005," Foote said. "Enterprise zones are not something spoken about in the real estate world as they should be."

The concept behind the zones is that employers would hire more workers and invest in more plant and equipment in low-income areas if there was an incentive available.

San Diego, National City and Chula Vista comprise a regional zone that stretches from Interstate 8 to Otay Mesa and west of La Mesa and Lemon Grove to encompass much of the land west of Interstate 805. A proposed expansion in the works would extend the zone north of Interstate 8 to as far as Mira Mesa and to eastern parts of Chula Vista.

Mayor Jerry Sanders announced Friday state approval of an expansion of the zone north of Interstate 8 to industrial parks as far north as Rancho Bernardo and to eastern parts of Chula Vista.

“Enterprise zones are crucial, because they are one of the most valuable economic development tools we have to attract, and in some cases, retain businesses here in the region, and the state for that matter,” Sanders said at a news conference. “I hope the folks in Sacramento are hearing this message loud and clear,” said Sanders.

“But for the enterprise zone, California might not have been successful in getting four multinational corporations to build or expand base-sector manufacturing operations here.”

He said all four, Soitec, ATK, Kyocera and Shire, considered locating in Arizona, Utah and Massachusetts but cited the zone as a key factor in being in San Diego. Sanders said about 920 local companies have used the program to hire more than 31,600 local workers and pay them an average $11.30 per hour; 13 percent were veterans, ex-offenders, disadvantaged and welfare recipients who qualified the companies for credits.

Enterprise Zone at a glance

What is an EZ? A geographic area, approved by the state, that meets income and economic criteria for needing improving.

Where is the EZ in San Diego? Portions of Chula Vista and San Diego and virtually all of National City.

What are the benefits? Employers can apply for a tax credit for $34,000 or more per employee over a five-year period. starting with 50 percent of wages (capped at maximum qualified amount).

What else? A tax credit on up to $1.6 million worth of sales taxes annually on equipment; accelerated depreciation deduction for a maximum $20,000 annually.

San Diego’s regional zone is one of 42 statewide, first authorized in 1984 and overseen by the state Department of Housing and Community Development.

“The enterprise zone is far and away the most lucrative program for businesses,” said Colin Parent, the department’s director of external affairs. “It provides the largest incentive and the fewest number of restrictions and caveats for companies.”

But the program's success has been its undoing, at least for Gov. Jerry Brown, who in 2010 recommended abolishing the program to save the annual cost to the state budget, in fiscal 2012, $650 million.

Brown's other cost-cutting proposal, eliminating local redevelopment agencies, did get legislative support but the enterprise zones were left untouched, thanks in part to the many Democratic legislators whose districts included zones.

"Now the approach of the administration has been to reform the program through the rule-making process," Parent said.

The new rules, expected to be announced in the next few months, would eliminate new retroactive subsidies, a step that cut could the subsidy by a third, Parent said. Currently, companies that sign up for the program can apply for subsidies for workers they hired as much as five years earlier.

A second change would simplify the qualification process for veterans and people who were on welfare.

"The intent here really is to address some of these longstanding abuses of the program," Parent said, "while improving the ability of the program to actually incentivize job growth."

Nationally, according to the Lincoln Institute of Land Policy in a study released in July, 3,000 enterprise zones around the country may result in more employment but don't necessarily lead to higher wages, tax revenues and other payback benefits. And in some cases, jobs just shift from outside a zone to inside one.

"The zone provides no overall economic benefit when spillovers are taken into account," said the authors, Daphne A. Kenyon, Adam H. Langley and Bethany P. Paquin.

If the program remains in place, downtown boosters hope it will do what redevelopment failed to do -- generate demand for jobs in addition to condos and apartments that have dominated the building scene for the past decade.

The result could be new office buildings to house new workers drawn to the area for its lively nightlife and the chance to hobnob with each other.

"We have surveyed our tenants downtown and their biggest concern and cause for considering leaving is parking," Foote said. "If you can build tax credits into that, it typically will more than offset that cost. The intrinsic value of downtown, they know that. We are still in an economic time when cost is the driving decision maker."

At Underground Elephant, Kulpa said not only have the tax credits covered some of his costs, but some of his employees also have moved downtown and reduced their dependence on a car.

"They get turned onto downtown," he said.

However, Kulpa lives in Bird Rock after having grown up and gone to college in Arizona.

"I used to live downtown, so I kind of get it," he said. "But I'm fortunate enough to live by the ocean."

At Holiday Foliage, Vanzutphen has become a believer in the program and hopes her fellow business executives sign on, too.

"I think people think it's a small, insignificant program," she said. "But when you dial into it, it's great. I hope the state doesn't take it away because they're not offering small-business tax incentives anywhere else."

Added the program's Moreno: "We're finding some companies catch on real quickly and they are our best testimonials in how the program can work."